R&D claims for software and emerging technologies - set for HMRC scrutiny
In December last year HMRC’s Research and Development Consultative Committee (RDCC) announced plans to form a subcommittee to identify commonly encountered ‘grey’ areas in software claims.
It was couched as part of a process to increase awareness of eligibility for Research and Development (R&D) tax credits among Small and Medium Enterprises (SMEs). But naturally such a review raises concerns that HMRC may want to tighten up on what they consider to be qualifying R&D in software development claims. We take a look at some of the issues that arrise in making software R&D tax relief claims.
It’s certainly the case that HMRC gets a comparatively high volume of smaller R&D claims from the 'Information and Communication' sector as compared to the ‘Manufacturing’ sector. In 2015-16 their analysis indicated that 'Manufacturing' represented 28% of all claims and 32% of the amount claimed while 'Information and Communication' represented 26% of all claims but only 20% of the amount claimed (Research and Development Tax Credits Statistics September 2017, page 12).
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Big money continues to flow into UK based tech companies - read four stories
Why aren't British software companies applying for tax refunds from the Government?
We’ve added a new video to our list of help videos on how to claims R&D tax credits
I know from supporting my clients in making software claims that there are specific challenges in assessing what qualifies as R&D in software development projects for SMEs wanting to claim R&D tax relief. There are a number of reasons for this.
Due to the rapid rate of change in the IT industry, what required R&D last year may be common place to achieve in no time at all. So keeping pace with what the current state is and what is pioneering, is no easy task for anyone.
People find it difficult to draw the distinction between the functional aims of a software development project and the technology requirements. They don’t always appreciate that just being functionally novel is not enough. To qualify as R&D for tax credits you must be able to demonstrate ‘an advance’ in underlying scientific or technological knowledge or capability has been achieved. For most people, understanding what is being done at the technology level and describing it is extremely difficult and even when that has been done, it’s not easy to make a judgement on whether it represents ‘an advance’.
The challenges become more acute when you are outsourcing all your software developments to third parties. This is because HMRC puts the onus for assessing what qualifies as R&D on the ‘Competent Technical Professional’. If you have no in house developers, you are reliant on your outsourced developers to assess what activities qualify as R&D. It won’t come as a surprise to anyone that sometimes those relationships are fraught and/or a number of different developers are hired and fired in quick succession, making the R&D claims process even harder.
One of the stated aims of the HMRC subcommittee review is to “provide material that HMRC will use to draft case studies based on successful claims, to enhance existing guidance. The group will not be considering any changes to the R&D guidelines.” Although they also say they will “examine how guidance relating to these areas can be created or improved and consider experiences of successful claims in areas of key emerging technologies.”
No one can really tell if this review will lead to a tightening up of what is accepted as R&D in software claims. But I can’t help thinking that unless HMRC are constantly developing new case studies, given the rapid state of change, the examples they create will soon be out of date and therefore difficult to relate to newer developments in software and emerging technologies. So the 'grey areas' may well persist.
Are you ready to find out if you qualify or how much your R&D claims could be worth?